The US Treasury Department has dropped its designation of China as a “currency manipulator” days before top officials of the world’s two largest economies were due to sign a preliminary trade agreement to ease an 18-month-old tariff war.

The widely expected decision came in a long-delayed semi-annual currency report, reversing an unexpected move by Treasury Secretary Steven Mnuchin last August at the height of US-China trade tensions.

Mnuchin had accused China of deliberately holding down the value of its yuan currency to create an unfair trade advantage, just hours after President Donald Trump, angered at the lack of progress in trade negotiations, had also accused China of manipulating its currency.

What is the purpose of this tag?

The Omnibus Trade and Competitiveness Act of 1988 requires the Treasury Secretary to analyse the exchange rate policies of other countries.

Under Section 3004 of the Act, the Secretary must “consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade”.

The US Treasury had designated Taiwan and South Korea as currency manipulators in 1988, the year that the Congress enacted the currency review law. China was the last country to get the designation, in 1994.

The US law sets out three criteria for identifying manipulation among major trading partners: a material global current account surplus, a significant bilateral trade surplus with the US and persistent one-way intervention in foreign exchange markets.

Other countries in the US watchlist

The Treasury report also cited continued concerns about the currency practices of eight other countries - Germany, Ireland, Italy, Japan, Malaysia, Singapore, South Korea and Vietnam - and added a ninth, Switzerland, to its list.

It raised particular concerns about Germany, the world’s fourth largest economy, which it said continued to have the world’s largest current account surplus and was slipping into recession. It said the German government had a responsibility to undertake tax cuts and boost domestic investment.

Why did the US remove the tag?

Beijing had recently met just one of the department’s three criteria needed for such a designation - a large bilateral trade surplus with the US.

In its latest currency report, the Treasury said that as part of the Phase 1 trade deal, China had made “enforceable commitments to refrain from competitive devaluation” and agreed to publish relevant data on exchange rates and external balances.

Chinese Vice-Premier Liu He reached Washington on January 13 for a White House ceremony to sign the trade deal with Trump. People familiar with the negotiations said that although the manipulator designation had no real consequences for Beijing, its removal was an important symbol of goodwill for Chinese officials.

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